Document Type

Honors Project - Open Access

Abstract

Payday lending is a highly controversial form of short-term, small-dollar credit that is banned in 13 states. Proponents of payday lending claim it provides a needed service to low-income families, and that bans take away options for these consumers, while its detractors claim it exploits vulnerable borrowers. I analyze the behavior of consumers in the market of a substitute, pawn shops, and find that consumers in states where payday lending is banned use pawn shops significantly more than consumers in states where payday lending is legal. This indicates that bans on payday lending could harm consumer welfare instead of preventing consumers from making ill-informed choices.

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Economics Commons

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